What is your view on the telecom sector? As limited as the listed pool may be, but given that Reliance Jio has now discontinued their 1 GB per day tariff plan, Bharti has also followed that. More importantly, structurally that capex is weaning off. That was the indication from Bharti on the sidelines of their earnings. Do these stocks become part of the core portfolio?
Rajesh Bhatia: They have to be part of your core portfolio. For the last five years, some of these stocks have done extremely well, especially the leaders in this space. This is a fantastic oligopoly. This is a consumer business and an extremely predictable one. There is a lot of tariff repair in terms of price increases that is happening and are yet to happen.
Imagine realisations going up 100% over a three- or four-year period. In any consumer company, that is a massive increase to your profitability. More tariff repair is going to happen. We have seen some of that in the last few days and that is going to continue into the next two years if not more. My sense is there is enormous pricing repair and ability to increase prices. All of that is going to translate into far greater bottom lines. The capex cycle is slowing down for them because they have already done most of the larger capex, which means that their free cash flow is going to increase dramatically. You should already be owning telecom as a core position. It is one of the best consumer spaces as far as I am concerned to be in and there is a lot of upside as you move forward as well.
The market is looking at consumption in a very different way right now. There are the food aggregators, the new-age tech companies which aid consumption in a very different way, not pure staples as we defined it even perhaps five years back. The entire pool that includes the likes of PB Fintech, Swiggy, Zomato, Paytm is getting enlarged. Where do you find value now?
Rajesh Bhatia: All of them. The digital economy is growing faster than the non-digital economy. These companies, which have spent years building their market bases, are growing way faster at a time when you are not sure about economic growth momentum. These are businesses which just may not be taking a greater share of the cake.
The digital economy is growing faster than the non-digital economy and therefore, their growth rates are much higher even though we are in anaemic growth environment. Also, a lot of these companies have gone from narrative stage to proven business model stage and are ramping up exceedingly fast. The visibility of growth in these businesses is very high, especially as a portfolio. These companies can grow at a fast rate for the next five, seven, or even ten years. Given that they are growing very fast and they are moving to a path of profitability is a very good sign and therefore, a portfolio of all these companies makes enormous sense.
Most of these are platform companies. My sense is that the revenue increases as you move forward a lot of that will translate to the bottom line. Like I pointed out, in a context of the fact that you are not as sure about economic growth momentum, these things make enormous sense.
What is your view on your positioning when it comes to some of these oil and gas stocks? Based on your fact sheet, that is one of your top sectoral holdings as of now. With so much overhang coming in on the Russia oil trading front, are you making any changes to how you are positioned in that segment?
Rajesh Bhatia: I do not know what fact sheet exactly you are looking at, but I am not as optimistic. Personally, as a fund manager, I like businesses where I can predict growth and these have to be growth companies over the next three, five, seven years. If they are less cyclical, like I pointed out, telecom, digital commerce, insurance, if they are less cyclical, even better, as you move forward and I like companies which are gaining market share. Those are the types of areas I focus on. Oil and gas at this moment is not a favourite area of mine just to summarise that.
We believe insurance was one of your favourite areas when you joined us back in May and you said that you will continue to prefer the health insurers as well as life insurers. But amongst the two, you believe that the private companies will capture the market from LIC and insurance, life insurance over general and health insurance was your preference. With respect to GST rates coming down, do you believe insurance as a pack becomes even more interesting?
Rajesh Bhatia: Again you are absolutely right. From a preference perspective, I like the life insurance companies, especially from a structural perspective. They had a lot of overhang as far as regulation was concerned over the last three, four, or five years. A lot of that regulatory overhang is gone. These are companies which have fantastic distribution for insurance products and this is a distribution product.
I am in the mutual fund business and SBI is the largest because they have fantastic distribution. So, not surprisingly, the banks are the largest even in the mutual fund business. Basically you need great distribution and of course, there is a player where they are gaining market share from. Apart from the fact that India is a very underpenetrated insurance market, there is an opportunity for them on several products to grow their market and as well as profitability. So, from a structural point of view, for a four-five-year perspective, these banks are very poised to continue to gain market share as they have for the last 10 years.
You should see how some of the leading life insurance companies have grown market share over the last 10 years. It has been fantastic. So, my sense is that the journey will continue even as you move forward. From a three-five-year perspective, I would say the life insurance companies are more attractive. The general insurance companies face a lot of competitive intensity.
There are some challenges in the health insurance sector in terms of claims, etc, but generally speaking again that is a very underpenetrated area. This is like investing. You need a disciplined player in the general insurance segment and there is a leading general insurance player which is extremely disciplined in terms of its underwriting which I like. There may be a little more cyclicality to that, but that is again a general insurer that I would want to back for the next three to five years, but look for underwriting discipline. It is just like investing to generate alpha.